Insider Ownership and Investment Efficiency

ABSTRACT This study examines the relationship between insider ownership and investment efficiency in Indian publicly listed firms, utilising panel data spanning 2001 to 2015. It explores how agency conflicts contribute to suboptimal capital investment decisions. Our analysis reveals that increased insider ownership is associated with reduced investment efficiency, primarily due to tendencies towards overinvestment rather than underinvestment. This pattern suggests that insiders may favour personal or empire‐building interests over shareholder value maximisation. Notably, the presence of independent directors on the board serves as a significant counterbalance, mitigating these inefficiencies. These findings hold when tested with different metrics for capital investment and investment opportunities. This research contributes to the literature by detailing the complex influence of ownership structure on investment behaviour and underscores the critical role of governance mechanisms, particularly board independence, in aligning investments with value creation. The insights are especially pertinent for developing economies with similar investor protection frameworks.